Setting the stage for inclusion of some of the petroleum products in the Goods and Services Tax (GST) regime, the government on Wednesday reduced GST rates for exploration and production sector to reduce the cascading effect arising on account of non-inclusion of petrol, diesel, aviation turbine fuel, natural gas and crude oil.

The latest move by the government comes after it reduced basic excise duty on petrol and diesel by Rs 2 per litre last week, following which governments of Gujarat, Maharashtra and Himachal Pradesh also reduced the VAT rates on petrol and diesel in their respective states.

Detailing the recommendations made by the GST Council in its 22nd meeting on Friday, the finance ministry in a statement said that GST rate on offshore works contract services and associated services relating to oil and gas exploration and production in the offshore areas beyond 12 nautical miles would be 12 per cent, lower than the earlier decided rate of 18 per cent. Also, transportation of natural gas through pipeline will attract 5 per cent GST without input tax credit or 12 per cent with full ITC as against the earlier rate of 18 per cent.

The finance ministry also said that GST on import of rigs and ancillary goods imported under lease will be exempted from IGST, subject to payment of appropriate IGST on the supply/import of such lease service and fulfilment of other specified conditions. Also, GST rate on bunker fuel has been reduced to 5 per cent, both for foreign going vessels and coastal vessels.

Notifications to give effect to these proposals will be issued shortly, the ministry said.

Tax experts said that the GST Council should consider inclusion of some of the left out petroleum products for complete benefit for the sector than taking these ad-hoc relief measures. “The much anticipated issues in the oil and gas sector, because of exclusion of petrol, diesel, crude, natural gas and ATF, have started surfacing. The exclusion of these products from GST increases the cost of these products as input GST not being creditable against sale of these products adds to the cost of these products. Further, excise duty / VAT payable on sale of these products is not available as credit to industries buying these products. Thus, it is a double hit,” Abhishek Jain, Tax Partner, EY India, said.

Jain further said, “It is encouraging to see various benefits being provided to this sector like lowering of excise duty and VAT rate (by some States) on petrol and diesel; reduction of GST rate from 18 per cent to 5 per cent (without credit) or 12 per cent (with credit) on transportation of natural gas through pipeline; reduction of GST rate on offshore works contract services related to oil and gas exploration from 18 per cent to 12 per cent, reduction of GST on bunker fuel from 18 per cent to 5 per cent. However, instead of these ad hoc relief measures, it would be great if the GST Council uses this momentum to include these products into GST which would provide complete relief to this sector.”

Keeping petroleum products such as petrol, diesel, natural gas out of the ambit of the GST has resulted in a cascading effect and higher cost in absence of input tax credit for upstream companies such as oil and gas exploration firms as well as for downstream refining companies.